Rosen had worked in the business when he was young, but upon reaching maturity decided to become a corporate lawyer. He ultimately got back into the business and succeeded his father, Harry, but he wasn’t able to complete this transition without having guidance along the way, he said. He noted his father employed advisors who forced the younger Rosen out of his comfort zone so he could learn various areas of the business.

“When you have a family business, you can’t trust yourself to be objective about your children—you’re either too hard or too easy, and bringing in outside advisors is critical,” explained Rosen.

As part of his own succession plan, Rosen will also use outside consultants that can form an objective assessment of any potential successor.

Although Rosen has three sons, aged 24, 22 and 20, he said he wouldn’t allow any of them to take on a leadership position unless they’d met certain criteria, including an MBA or similar business degree, and three years of outside work experience.

Additionally, Rosen has been holding an annual meeting with each of his sons since they turned 16. He underscored the importance of these meetings by asking them to fill out a non-disclosure agreement and paying them to attend.

“Take them through the business strategy and financial performance,” he said. “Make them feel a part of the process and give them an understanding of what they’re ultimately going to own or work in. If you do that with young children, you’ll be surprised how much progress you make in getting them to develop a mature attitude towards succession.”

Founded in 1954, Harry Rosen continues to build client relationships and provide customers with the latest in men’s fashion.

“The way they conducted business in those days was very important,” said Rosen. “They earned the trust of each individual client, much like what [insurance professionals] do. They learned about their clients, kept extensive records of what they bought, what they did and they built it one client at a time.”

In the early 1960s Harry Rosen developed a corporate brand with advertising stating, “Ask Harry.” These ads featured a menswear-related question; for example, “What part of your thumb should touch the bottom of your jacket?” with “Harry’s” answer below it. Rosen explained that this branding established the retail company as experts in menswear and men in general, and is still critical in how they operate today.

Two critical elements that form the basis of a solid brokerage succession include: planning and executing. Knowing how and when to plan represents only half of the equation. Once the planning stage has been completed, the road map needs to be effectively put into place to reap the benefits of a fruitful succession. Several key questions need to be posed throughout the process.

Before engaging in any formal planning, a broker must pose the question: Do I have a legitimate grasp of the effort that needs to be expended? Succession planning is a difficult undertaking. The flipside, however, is that a triumphant succession experience is highly rewarding for all parties involved. The broker’s emotional attachment to the business significantly impacts (and often hinders) the transitioning of the brokerage into new ownership hands.

At the onset of the planning stage the broker needs to consider: 1) The “who” question in selecting a successor to inherit the business, 2) Whether the brokerage is succession ready with respect to financial performance, and staff preparation, 3) Upon answering the previous two questions, reassurance that the successor can finance their end of the bargain.

Key elements in selecting a successor involve contemplating the compatibility with stakeholders, ability to lead and passion for the business. Preparation remains the focal point that contributes towards a successful experience. Early successor exposure, job shadowing, “letting-go” to accept an outcome and avoiding a “cloning at all costs” mentality represent best practices towards proper mentoring.

The litmus test to gauge whether the brokerage itself is succession-ready needs to be assessed from both a financial and non-financial perspective. Knowing if the brokerage is adequately capitalized and has sufficient cash flow to fund debt financing is of paramount importance. The flipside is that considerations such as the impact on staff, and assessing whether the successor is effectively trained merit as much of the broker’s time as tangible financial parameters.

A vital next step is to ensure the successor has conducted due diligence and aligned the sources and types of financing. Questions such as the following need to be answered: Is the successor providing any capital to evidence a proper alignment of interests? Is debt or equity financing more appropriate? Will the broker supplement any third party financing with a vendor-take back arrangement? With respect to the transaction structure, a broker should answer the following questions: Has a price been agreed upon? Are there adverse tax consequences that can be mitigated? Will the transaction be staged over an elongated period? Will the successor purchase the shares or assets of the brokerage?

A plan is of limited usefulness unless effectively executed. Key points to negotiate with the buyer include: valuation, financing arrangements, deal structure, closing timeline, and responsibilities on a go-forward basis. In the end, the succession process may appear as a daunting task. Challenges may be mitigated but remember that it is never too early to think succession.

You may not yet be ready to sell your business but it is never too early to start the planning process. Your planning should begin with your external team of professionals, your accountant, tax advisor, lawyer, financial planner and M&A consultant. This will begin setting the strategy and plans necessary to look for the right successor, internally or otherwise.

Today’s marketplace has more buyers than sellers. This keeps P&C prices up. Being approached by one buyer with a predetermined price may not get you your best price. Ultimately the purchasers will look at the cash flow (EBITDA) along with many other factors. If you can grow the business, and increase EBITDA your selling price can be greatly improved. Assume that EBIDTA of $500,000 is increased to $550,000 and the multiple for a purchaser is 6.0 times. Your selling price will have increased by $300,000.

Having a professional evaluation done by a CA who understands the P&C business will help the sale process. The valuation can be taken to the successors you have chosen or used a starting point for the M&A consultant to package the business opportunity to the marketplace.

The current market conditions are in a broker’s favour, with more buyers than sellers. Having said that, getting the top price for your brokerage involves more than just applying a multiple to your gross commissions or cash flow. In addition to exposing a brokerage to as many potential purchasers as possible, a potential seller must also have a good understanding of what creates value to the market as a whole and more specifically what is valued by specific investors.

There are three broad areas when dealing with potential purchasers. First, you should be able support post-acquisition cash flow on which the price has been based. Second, be able to demonstrate that the risks involved in earning the post-acquisition cash flow are reasonable. Third, you must understand the motivation and business circumstances of a potential purchaser.

In addition to obtaining the highest cash price for your brokerage, you must adequately plan, in advance, the structure of the transaction to ensure that you realize the highest after-tax proceeds. In many cases effective tax planning must be done at least two years prior to the transaction.

The question on the minds of many soon-to-be retired brokerage owners is: “What is my business worth?” Of course, the real answer to this question is, “What someone is willing to pay for it.”

Many times, sellers have high expectations for the value of their businesses, more so than industry multiples may dictate. Meanwhile, buyers fear the unknown, are risk conscious, and mitigate risk by conservatively valuing businesses at lower revenue multiples. The discrepancy between a buyer’s and seller’s sense of value can cause lengthy and frustrating negotiation processes. Although this is by no means a simple problem to solve, the situation can be improved through the use of a comprehensive valuation.

Let’s think about the two parties involved and what their true objectives are. The seller’s objectives are usually somewhat easy to understand; their goal is to sell the business for what they believe it is worth, quickly, while leaving their policyholders in good hands. The buyer’s objectives are seemingly obvious—to pay as little as possible to maximize their return; however, their real objective is to make a good return for the amount of risk taken.

A comprehensive valuation can be used to bring clarity to a business’s areas of ambiguity, illustrate value where it exists, and in doing so, lower the buyer’s perceived sense of risk. If risk is perceived as lower, a higher multiple can be justified, and both parties can win.

Too often, businesses are valued solely based on revenue and a subjectively chosen multiple. Think of a business as an iceberg, and revenue as the tip floating above the surface. Revenue is often the first and easiest metric to identify. However, far more important are the internal metrics of the business that are supporting that revenue stream. In the insurance business, these metrics fall into categories including book composition, client relationships, business history, and industry trends. For example, what is the average percent of revenue per client? Is revenue well distributed across many clients or only a few? How has the broker branded themselves, as a group, or as an individual? Depending on these factors, a buyer can expect different levels of policyholder attrition after a sale.

A comprehensive valuation takes these and other key metrics into account to quantify overall acquisition risk, allowing for a more specific value estimate. In addition, buyers can use this type of valuation to strategically focus on specific areas of their business to improve the value of their business most effectively and efficiently.